Corzine's MF Enters Distress With 18% Yields: Corporate Finance

Published 2:26 am, Wednesday, November 30, 2011

Oct. 26 (Bloomberg) -- MF Global Holdings Ltd. is looking into options that might include selling itself after investors pushed bonds of the futures brokerage that is trying to become an investment bank into distressed territory for the first time yesterday.

Evercore Partners Inc. is advising MF Global on the review of its business, said a person with knowledge of the matter, who declined to be identified because the discussions are private. The hiring of Evercore was first reported by the Wall Street Journal. Its 6.25 percent bonds due in August 2016 have fallen into distressed territory this week, yielding 17.83 percent, or 16.8 percentage points more than comparable-maturity Treasuries.

MF Global, headed by former Goldman Sachs Group Inc. leader Jon Corzine, reported its biggest quarterly loss ever yesterday. The day before, Moody's Investors Service cut its credit ratings on concern that the broker won't meet earnings targets and may not be able to manage investments in European sovereign debt. The company's shares fell 27 percent at 10:35 a.m. in New York, bringing their loss this week to 63 percent. Its market value is now $222.6 million, down from $1.35 billion on March 31, according to data compiled by Bloomberg.

"It's aggregated risk," said Richard Repetto, an analyst at Sandler O'Neill & Partners LP. The positions in Europe, the further downgrade potential and a quarterly loss combined to discourage investors yesterday, he said.

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"We can't comment on rumors or speculation," said Diana DeSocio, a spokeswoman.

Distressed Bonds

The company's $325 million of 6.25 percent bonds, due in August 2016, fell 24.8 cents yesterday to 63.8 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Moody's lowered the long-term ranking to Baa3 from Baa2 and left MF Global on review for a further downgrade to junk status after highlighting its repurchase transactions to debt of European governments that have been hit by the region's debt crisis. Junk bonds are rated below Baa3 by Moody's and BBB- by Standard & Poor's.

S&P said this week that 208 companies in the U.S. had bonds trading at spreads of at least 10 percentage points, the level considered distressed, as of Oct. 14, up from 162 in September and the most since August 2009. By dollar amount, a total of $116.8 billion of bonds were in distress, an increase from $94.5 billion in September, the ratings firm said in an Oct.25 report.

Such spreads are typically found on bonds rated CCC, or the lowest rung of speculative grade, according to Bank of America Merrill Lynch index data. The firm's index tracking debt with those ratings has an average yield of 12.73 percentage points more than Treasuries.

Corzine, 64, who helped run Goldman Sachs from 1994 to 1999, is failing to convince investors that he can transform the futures broker into a Wall Street contender.

The 6.25 percent notes may pay an extra percentage point of interest if Corzine, who was governor of and U.S. Senator from New Jersey after he left Goldman Sachs, is named to a federal post and confirmed by the Senate before July 2013, MF Global said in an Aug. 9 regulatory filing. That so-called key man clause wouldn't be triggered if the bonds were upgraded to ratings of A3 by Moody's and A- by Standard & Poor's.

The idea behind the clause was to alleviate concern among investors that Corzine might leave, according to a person with knowledge of the structure of the offering.

Analysts at KBW Inc., led by Niamh Alexander, wrote in a note yesterday that the Moody's downgrade and lower earnings could cause a ripple effect on the company, raising borrowing costs and triggering collateral calls.

'Recognize Losses'

"It also exposes MF to collateral calls of up to $5 million," the note said. "We believe it could also prompt lenders to reduce financing, clients to withdraw assets and trigger the need to recognize losses on certain bilateral over- the-counter and off-balance sheet transactions."

MF Global said yesterday it had a net loss of $191.6 million, or $1.16 a share, for the three months ended Sept. 30, compared with a loss of $94.3 million, or 59 cents, a year earlier. Net revenue fell 14.3 percent to $205.9 million.

The firm earns money by charging interest on client funds it holds that back futures trades. Corzine said the Federal Reserve's target overnight interest rate, which has been between zero and 0.25 percent since late 2008, makes the futures brokerage business challenging.

The "current low interest environment and volatile capital market conditions" make it unlikely MF Global can achieve targets of $200 million to $300 million in annual pretax profit, Moody's said in its Oct. 24 report.

European Positions

The broker has "little principal risk" from its positions in Europe and isn't adding to them, Corzine said on a conference call with analysts yesterday. The short-term debt positions are "my personal responsibility and a prime focus of my attention," he said.

MF Global is lagging behind its peers in the broker-dealer community. Average yields on bonds from brokerage houses are 4.98 percent and those on all BBB rated issues are 4.46 percent, according to Bank of America Merrill Lynch Index data. MF's shares have dropped 82 percent to $1.35 since Aug. 1, the day before the bond sale, compared with an 18 percent decline in an index of 11 securities broker-dealers.

The one thing holding the company together right now may be Corzine at the helm, Repetto said.

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